Use the table for the question(s)below.
-Suppose a risky security pays an average cash flow of $100 in one year.The risk-free rate is 5%,and the expected return on the market index is 13%.If the returns on this security are high when the economy is strong and low when the economy is weak,but the returns vary by only half as much as the market index,what risk premium is appropriate for this security?
A)4%
B)6.5%
C)9%
D)11%

Question

Use the table for the question(s)below. 
-Suppose a risky security pays an average cash flow of $100 in one year.The risk-free rate is 5%,and the expected return on the market index is 13%.If the returns on this security are high when the economy is strong and low when the economy is weak,but the returns vary by only half as much as the market index,what risk premium is appropriate for this security?
A)4% 
B)6.5% 
C)9% 
D)11%

Quizplus · Accepted Answer

The correct answer is A.The risk premium is the difference between the expected return on the security and the risk-free rate. In this case, the expected return on the security is 13% (the expected return on the market index) + 4% (the risk premium). Therefore, the risk premium is 4%.

Use the Table for the Question(s)below